Tea companies to see another round of cost inflation but still have a buffer for margins

Tea producers had seen prices move up at a slow pace compared to the wage cost over the years, but they enjoyed hefty margins for a change as prices shot up after the onset of the Covid-19 pandemic.

The total wages per man-day in West Bengal and Assam increased at a CAGR of 7% and 10%, respectively during CY2014-CY2019, which continued to squeeze the margins of the tea players as the average north India auction prices remained stagnant during the same period, with a CAGR of only 1%.

Things changed for the better for tea stocks as auction prices in 2020 sharply increased by 32% on the back of production loss due to the pandemic, aiding recovery in profitability of the tea players.

However, the cost pressure emerged after West Bengal and Assam announced hikes in the basic wage rates by 15% and 23% from January 2021 and February 2021, respectively.

The cost of production has increased further as last month, the labour welfare department of government of Assam announced an increase in the basic wage of tea estate workers in the state by Rs 27/day with effect from August 1, 2022, leading to the revised basic wages of Rs 232/day and Rs 210/day for the Brahmaputra and the Barak Valley, respectively.

As a result, the total wage per man-day (including bonus, other cash components and benefits) for the tea estate workers in Assam is estimated to increase by 9% given the increase in basic wages by Rs 27/day from August 2022.

The cost of production is likely to increase by around Rs 14/kg though the full year impact in FY23 would be around Rs 9/kg.

On the flip side, rating and research agency ICRA expects such an increase in cost to be offset by the significant rise in tea prices, particularly for quality teas, witnessed in recent months thus protecting margins in current fiscal.

The higher quality tea variety that is sold by the larger listed players are sold at a higher price compared to the auction prices and would cushion some or all of the wage cost inflation for producers.